The Impact of Economic Growth and Structural Changes on Carbon Emissions in SAARC Countries: A Panel Cointegration Analysis

Abstract

Rapid economic growth, structural transformation, and FDI-driven development in SAARC countries have increased CO₂ emissions and environmental degradation despite supporting economic progress. The present study examines the short-run and long-run influence of economic growth, structural change, Foreign Direct Investment (FDI) and urbanization on carbon emissions in South Asian Association for Regional Cooperation (SAARC) member nations. This analysis employed panel cointegration tests and ARDL techniques utilizing a balanced panel dataset of annual observations spanning the period from 2003 to 2021. Furthermore, the Dumitrescu–Hurlin panel causality test is applied to examine the direction of causality among the variables. The results revealed that both FDI and urbanization increases CO₂ emissions, although the effect of urbanization is strongly significant in the long-run compared to FDI. In contrast, agriculture, industry, and services shares are associated with a reduction in CO₂ emissions in the long run, while no significant short-run effects are observed. However, the short-run GDP growth rate (annual %) slightly accelerates CO₂ emissions with evidence of a bidirectional causal relationship between GDP growth and CO₂ emissions. Panel causality test also indicated bidirectional causality between FDI and CO₂ emissions as well as between urbanization and CO₂ emissions. Moreover, the causality exercise explored a bidirectional relationships between industry share, FDI, and urbanization. The findings of this study provides a basis for climate-responsive development planning across SAARC as well as individual countries. Government officials and policymakers need to pay special attention to guide sustainable urban planning and investment policies that balance economic expansion with environmental protection in this region.